Omissions Save Fraud-Based Counterclaims From Dismissal

• Posted on: Oct 3 2022

By: Jeffrey M. Haber

In past articles, we have noted the importance of identifying the statements claimed to be false and misleading. In this regard, we talked about the need to plead the who, what, where, when and how of the alleged fraud. In other words, the plaintiff must allege the first paragraph of any newspaper story. The reason for such pleading is to satisfy the particularity requirement of CPLR § 3016(b). 

Under CPLR § 3016(b), a plaintiff alleging fraud must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true.¹ In Pludeman v. Northern Leasing Sys., Inc., 10 N.Y.3d 486, 491 (2008), the Court of Appeals explained that the purpose of CPLR § 3016(b) is to inform a defendant of the complained-of conduct. Notwithstanding, CPLR § 3016(b) “should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.”² Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.”³ Thus, a plaintiff will satisfy CPLR § 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct.⁴ 

When the allegation of fraud centers around an omission, the plaintiff must allege a duty to disclose, regardless of whether there is a fiduciary relationship between the parties. Such a duty may arise when the defendant’s superior knowledge of essential facts renders the transaction between the parties without disclosure inherently unfair.⁵

We previously wrote about fraud by omission, or fraudulent concealment, here.

The foregoing principles were examined by the Appellate Division, First Department in Beckman Coulter, Inc. v. Jabil Circuit Inc., 2022 N.Y. Slip Op. 05367 (1st Dept. Sept. 29, 2022) (here). 

Beckman arose from a contractual dispute between Beckman Coulter, Inc., a producer of diagnostic equipment for medical providers, and Jabil Inc. and Nypro Inc. (collectively, “Jabil”), a manufacturer of printed circuit board assemblies (“PCBAs”) that go into Beckman’s equipment. Pursuant to the terms of a 2017 agreement, Jabil supplied nearly all of the PCBAs that Beckman used.

Jabil maintained that Beckman made material misrepresentations and omissions to induce it into the contract. In particular, Jabil claimed that plaintiff misrepresented its historical PCBA volume, payments to third-party PCBA manufacturers, current demand and trends for its portfolio of electronic products, and its commitment to its business. Based upon these misrepresentations and omissions, defendant claimed that it was duped into believing that the relationship would yield a baseline revenue level of $46 million.

After the agreement was executed, a number of contractual disputes developed between the parties. Following months of unsuccessful negotiations, Beckman filed a lawsuit for declaratory judgment, injunctive relief, and damages. Jabil filed an answer with counterclaims, two of which were for fraudulent inducement and fraudulent concealment.

Plaintiff moved to dismiss the fraud-based counterclaims. Among other arguments, plaintiff noted that the alleged assurances that defendants relied upon ran counter to the agreement, which contained no promise, and expressly foreclosed reliance on any extracontractual representations regarding the amount of PCBAs plaintiff would order. 

The motion court granted the motion. The court concluded that the extracontractual representations were barred by the agreement’s disclaimer provision and, in any event, defendants failed to allege any actionable omission or misrepresentation related to revenue projections.

On appeal, the First Department modified the order of dismissal to reinstate the counterclaims to the extent they were based on allegations of fraudulent omission, and otherwise affirmed the order.

The Court held that the motion court correctly dismissed the fraud counterclaims to the extent they were premised on alleged misrepresentations. Like the motion court, the Court found that Jabil failed to allege any actionable misrepresentations of material fact.⁶ The Court noted that the “counterclaims do not actually allege that the historical profit/loss statements or other financial information was falsified or inaccurate.”⁷ “Even if the counterclaim allegation that D&B concealed their “actual revenue figures and financials’ implie[d] that the disclosed information was falsified or inaccurate,” said the Court, that allegation was “conclusory [and] speculative” and did “not satisfy the fraud pleading requirement, as the other material facts alleged in the complaint … [were] not sufficient to permit a reasonable inference that the figures disclosed were, in fact, falsified and that the true figures were kept hidden”.⁸ 

In addition, the Court found that the “contractual disclaimers” in the agreement “preclude[d] the fraud claims based on alleged revenue and demand misrepresentations, as Jabil expressly represented that it was entering the deal without relying on any of D&B’s pre-contractual representations with respect to those issues.”

[Ed. Note: In prior articles, we discussed the impact a disclaimer clause in a contract can have on a fraud claim. See, e.g., here. Namely, a disclaimer clause can preclude a fraud claim when (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party.⁹]

“However,” said the Court, “the [motion] court should not have dismissed the fraud counterclaims to the extent the claims [were] premised on allegations of a fraudulent omission.”¹⁰ The Court held that “Jabil adequately alleged an actionable omission of material fact based on the allegations that D&B had a duty to disclose their underlying intention and the planned consequences of their acquisition of another company, as this alleged hidden plan was peculiarly within their knowledge and could not have been discovered by Jabil through the exercise of ordinary intelligence or diligence; that D&B failed to disclose this plan; and that D&B knew this plan would negatively impact Jabil’s economic interests in its contractual arrangement with them”.¹¹ 

Takeaway

When a person claims fraud, he/she typically claims that the alleged wrongdoer made an affirmative misrepresentation of fact. Fraud does not, however, always concern an affirmative statement. Sometimes a person can perpetrate a fraud through the omission of a material fact. For this reason, when alleging fraud, a plaintiff may allege that the defendant made “a misrepresentation or a material omission of fact which was false and known to be false.”¹² 

Where fraud by omission is claimed, as in Beckman, the plaintiff must allege that the defendant “had special knowledge or information regarding” the transaction “that [was] not ascertainable by the plaintiff[].”¹³ If that is done, as in Beckman, the plaintiff will survive a motion to dismiss.

 Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

Footnotes

1. Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559-60 (2009).
2. Pludeman, 10 N.Y.3d at 491 (internal quotation marks and citation omitted).
3. Id. at 492.
4. Id.
5. Greenman-Pedersen, Inc. v. Berryman & Henigar, Inc., 130 A.D.3d 514, 516 (1st Dept. 2015), lv. denied, 29 N.Y.3d 913 (2017) (quoting, Pramer S.C.A. v. Abaplus Intl. Corp., 76 A.D.3d 89, 99 (1st Dept. 2010)).
6. Slip Op. at *1.
7. Id.
8. Id. (citations omitted).
9. Basis Yield Alpha Fund [Master] v. Goldman Sachs Group, Inc., 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v Harris, 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch, 81 A.D.3d 419 (1st Dept. 2011).
10. Slip Op. at *1.
11. Id. (citing, Sports Tech. Applications, Inc. v. MLB Advanced Media, L.P., 188 A.D.3d 619, 620 (1st Dept. 2020)).
12. Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 178 (2011) (internal quotation marks and citation omitted); Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 421 (1996).
13. Williams v. Sidley Austin Brown & Wood, L.L.P., 38 A.D.3d 219, 220 (1st Dept. 2007); Selechnik v. Law Off. of Howard R. Birnbach, 82 A.D.3d 1077, 1078-1079 (2d Dept. 2011).